MANAGERIAL ECONOMICS 12 th Edition

1. MANAGERIAL ECONOMICS12th Edition By Mark Hirschey © 2009, 2006 South-Western, a part of Cengage Learning

2. Forecasting Chapter 6 © 2009, 2006 South-Western, a part of Cengage Learning

3. Chapter 6OVERVIEW • Forecasting Applications • Qualitative Analysis • Trend Analysis and Projection • Business Cycle • Exponential Smoothing • Econometric Forecasting • Judging Forecast Reliability • Choosing the Best Forecast Technique © 2009, 2006 South-Western, a part of Cengage Learning

4. macroeconomic forecasting microeconomic forecasting qualitative analysis personal insight panel consensus delphi method survey techniques trend analysis secular trend cyclical fluctuation seasonality irregular or random influences linear trend analysis growth trend analysis business cycle economic indicators composite index economic recession economic expansion exponential smoothing one-parameter (simple) exponential smoothing two-parameter (Holt) exponential smoothing three-parameter (Winters) exponential smoothing econometric methods identities behavioral equations forecast reliability test group forecast group sample mean forecast error Chapter 6KEY CONCEPTS © 2009, 2006 South-Western, a part of Cengage Learning

5. Forecasting Applications • Macroeconomic Applications • Predictions of economic activity at the national or international level, e.g., inflation or employment. • Microeconomic Applications • Predictions of company and industry performance, e.g., business profits. • Forecast Techniques • Qualitative analysis. • Trend analysis and projection. • Exponential smoothing. • Econometric methods. © 2009, 2006 South-Western, a part of Cengage Learning

6. Qualitative Analysis • Expert Opinion • Informed personal insight is always useful. • Panel consensus reconciles different views. • Delphi method seeks informed consensus. • Survey Techniques • Random samples give population profile. • Stratified samples give detailed profiles of population segments. © 2009, 2006 South-Western, a part of Cengage Learning

7. Trend Analysis and Projection • Secular trends show fundamental patterns of growth or decline. • Constant unit growth is linear. • Constant percentage growth is exponential. • Cyclical fluctuations show variation according to macroeconomic conditions. • Cyclical normal goods have εI > 1, e.g., housing. • Seasonal variation due to weather or custom is often important, e.g., summer demand for soda. • Random variation can be notable. © 2009, 2006 South-Western, a part of Cengage Learning

8. Trend Analysis and Projection Sales Trend Cyclical Pattern Years Sales Random Fluctuations Trend SeasonalPattern Months © 2009, 2006 South-Western, a part of Cengage Learning

9. Trend Analysis and Projection Exponential estimate Microsoft Sales Linear estimate the antilog ) © 2009, 2006 South-Western, a part of Cengage Learning

10. Trend Analysis and Projection Microsoft Sales Linear estimate 2005 2009 Exponential estimate 2005 2009 © 2009, 2006 South-Western, a part of Cengage Learning

11. Business Cycle • The Business Cycle is a rhythmic pattern of economic expansion and contraction. • Economic indicators help forecast the economy. • Leading indicators, e.g., stock prices. • Coincident indicators, e.g., production. • Lagging indicators, e.g., unemployment. • Economic recessions are periods of declining economic activity. © 2009, 2006 South-Western, a part of Cengage Learning

12. Business Cycle Real GDP © 2009, 2006 South-Western, a part of Cengage Learning

13. Exponential Smoothing • One-parameter Exponential Smoothing • Used to forecast relatively stable activity. • Two-parameter Exponential Smoothing • Used to forecast relatively stable growth. • Three-parameter Exponential Smoothing • Used to forecast irregular growth. • Practical Use of Exponential Smoothing Techniques © 2009, 2006 South-Western, a part of Cengage Learning

14. Exponential Smoothing Nonseasonal Additive Seasonal Multiplicative Seasonal Constant One parameter (Simple) exponential smoothing Three parameter Linear Trend Two parameter (Holt) exponential smoothing Winters exponential smoothing Dampened Trend © 2009, 2006 South-Western, a part of Cengage Learning

15. Econometric Forecasting • Advantages of Econometric Methods • Models can benefit from economic insight. • Forecast error analysis can improve models. • Single Equation Models • Show how Y depends on X variables. • Multiple-equation Systems • Show how many Y variables depend on several X variables. © 2009, 2006 South-Western, a part of Cengage Learning

16. Econometric Forecasting Single equation Multiple equation © 2009, 2006 South-Western, a part of Cengage Learning

17. Judging Forecast Reliability • Tests of Predictive Capability • Consistency between test and forecast sample suggests predictive accuracy. • Correlation Analysis • High correlation indicates predictive accuracy. • Sample Mean Forecast Error Analysis • Low average forecast error points to predictive accuracy. © 2009, 2006 South-Western, a part of Cengage Learning

18. Choosing the Best Forecast Technique • Data Requirements • Scarce data mandates use of simple forecast methods. • Complex methods require extensive data. • Time Horizon Problems • Short-run versus long-run. • Role of Judgment • Everybody forecasts. • Better forecasts are useful. © 2009, 2006 South-Western, a part of Cengage Learning

19. Choosing the Best Forecast Technique Sales Phase IV Decline and Abandonment Phase I Introduction and Start-up Phase II Rapid Growth Phase III Maturity Forecast with three parameter exponential smoothing and trend analysis Forecast with two parameter exponential smoothing and econometric models Forecast with three parameter exponential smoothing and trend analysis Forecast with qualitative methods or market experiments Time in Years © 2009, 2006 South-Western, a part of Cengage Learning